We are going to jump right in. This post is going to be a good one. And even though I have only written three sentences, I already know this post is going to help a lot of people. I am going to expand on the concept of dividends and show you how using the examples of the BP dividend, the KMI dividend, and the GM dividend, we can turn these into cash generating monthly dividend stocks with very little effort at all.
At Stony Brook Securities, we don’t just phone it in. Buying a stock just because it pays a dividend is an example of phoning it in. Showing up at 9 am for your job, taking an hour lunch, and leaving at 5 pm sharp every single day is also phoning it in. You cannot expect above average or extraordinary results by phoning it in or doing the bare minimum.
It also requires close to nothing to get marginal and underperforming returns. Anyone can do this. Anyone can buy stocks in a bull market. But very few can continuously beat the market and create the financial future they could only have dreamed of.
We will go more into detail here in a second about dividends. However, they for the most part only come quarterly. We want more. And in getting more, we can improve out odds of making money over time. That is where this concept of monthly dividend stocks come in.
This article is going to be a lot of fun. We are going to show you how easy it will be to improve on the standard dividend. Hell, if you like collecting $200 a year in dividends, I am sure you will appreciate and be totally okay with collecting $500 with monthly dividend stocks with zero extra cost to you.
By using examples from the BP dividend, KMI dividend, and GM dividend, I am going to show you how to collect more money with these monthly dividend stocks. If I told you after finishing this article, you are going to be able to make 200% more in “dividends” a year for free with only spending five extra minutes a month, would you be interested?
If not, please do not continue reading. It will be a waste of both our times. However, if the idea of using monthly dividend stocks such as the BP stock dividend, the GM stock dividend, and the Kinder Morgan dividend to more than double your dividend income sounds interested, continue reading! You will be glad you did :).
What is a Dividend and Why Do Companies Pay a Dividend…The JNJ Dividend?
That video from ETrade is a fine example of the standard approach to what a dividend is. Now here is our take on what a dividend is. For this, we are going to talk about Johnson & Johnson and specifically the JNJ dividend.
Ever fell and cut your knee and put a band-aid on it? You bought that band-aid from Johnson & Johnson. Every bought anything from a CVS? Yup…Johnson & Johnson.
But back to the JNJ dividend since I could feel myself getting off topic 🙂
Johnson & Johnson is a large cap Dow component that has been around since 1886. While its products are in our lives almost every single day, they are not growing as rapidly as they used to.
To fundamental investors, stocks are valued off of their growth and earnings potential. For this, they are assigned a price to earnings ratio. If a company is believed to be able to grow ten times over the next few years, a ten price to earnings ratio is a fair value to assign to the company. There are MANY ways to assigning a value to a company and using earnings potential is only one of them.
However, JNJ is a profitable company. They can take those profits and do whatever they like with them. For stocks that believe they can continue to grow, a majority of those profits are reinvested back into the company to grow the business and provide shareholder value via growing the company. Not all companies feel like they are growing though.
Johnson and Johnson is not a company that has any real chance of growing to be a lot larger than they currently are.
Growth interested investors will see that JNJ does not have the potential to grow a lot and because of this will choose to invest their money elsewhere. This puts the company in an interesting position as they want every single dollar possible to be invested in the company thus create a higher stock price.
One thing companies without excellent growth potential do to attract money and shareholders is to pay a dividend. This is where the JNJ dividend comes into play. The company does not see great prospects for growth. Because of this, they see growth investors pull their money and go elsewhere. To combat growth money leaving the stock, they pay a dividend (JNJ dividend) to attract a different breed of investors who are less interested in growth and more interested in receiving a yield (dividend). These types of investors are less of the hedge fund type who are trying to beat the market or more of the pension fund type who are looking to remain solvent.
Right now, the JNJ dividend pays out $3.20 per share. Many people get confused, and all worked up with the dividend yield (2.56% in the case as of today). However, a dividend is a fixed payout meaning it is nothing more than a dividend per share.
Let’s break this down. JNJ agrees to pay shareholders $3.20 spread out over four dividend payments over the course of the year. On ex-dividend day, the stock price of Johnson & Johnson will be reduced by $0.80 because JNJ uses that cash to pay to shareholders. If we have 100 shares of stock, our quarterly JNJ dividend payment becomes $80 ($0.80 per share) and is given to us as a credit in our brokerage account.
Let me sum of what we have spoken about in this section. Companies that see a lack of growth potential attract shareholders and investors by paying a dividend. It is an excuse to attract yield-seeking investors and pension funds. Johnson & Johnson is a company that is not in its growth cycle, and they created the JNJ dividend to attract yield-seeking money because the growth money left.
JNJ is a stock that pays a dividend because it does not see high prospects for growth. On the other hand, we have an ultra growth company like Amazon. Amazon and Jeff Bezos reinvest all of their money back into the business because they are in super growth mode and do not wish to “waste” any cash by paying an Amazon dividend.
Let’s dig into a little bit more of why there is no Amazon dividend.
Amazon Stock Dividend…Where is the Amazon Dividend?
Does Amazon pay dividends? Hell no. They are growing!
Check out the Amazon dividend yield at Yahoo Finance.
Interested in looking to invest in growth stocks? Here is a sign you have found one. We have a company who’s actions are saying, “We don’t have time for this dividend noise (Amazon stock dividend), we’d rather put every single penny back into the business and grow the company!”
There are companies who would like to grow at all costs. That is why they attract investors who are not seeking yield (Amazon dividend yield is 0% 🙁 ) and are looking to make some real money.
Let’s look at an example to show why there is no AMZN dividend.
Amazon has let’s say 500 million dollars cash. What to do? Whereas Johnson & Johnson says, “Well, we can’t grow the business with that much, let’s give that back to their shareholders by paying them to hold out stock,” Amazon goes,
Thank God we have 500 million in cash. An Amazon stock dividend are you drunk? We need that money to hire employees and create new lines of revenue. We are trying to becomes the largest company in the world, and we need every penny we can get. Who cares about Amazon dividends. People won’t be complaining about the Amazon dividend they missed out on in 2017 when in 2020 their stock will be worth 50% more than it is now.
That is a BIG difference.
There is a JNJ dividend because the company feels they will provide more shareholder value by paying shareholders to own the stock.
There is no Amazon stock dividend or Amazon dividend yield because the company believes they can provide more shareholder value by reinvesting in the company and thus, growing the business. Hence, no Amazon dividend :).
Does Amazon pay dividends? No. Why? Because they will grow the company at all costs!
Kinda reminds us of Google…right?
Monthly Dividend Stocks and the Gameplan
It was very important for us to have that discussion. Dividends are lazy. Companies that do not think they can grow their business to provide shareholder value pay a dividend to make up for their lack of growth and provide shareholder value by paying investors to own the stock.
On the other hand, companies that are growing at all costs do not give any money away, and they reinvest all of their money to provide shareholder value by growing the business (hence, no AMZN dividend).
For these reasons, we don’t think too highly of dividend stocks. But, that does not stop us from our goal of trying to make as much money as possible every single day in the markets, which brings us to the idea of monthly dividend stocks. These are stocks that while they don’t pay monthly dividends (BP dividend, KMI dividend, GM dividend), we can turn them into monthly dividend stocks with only five minutes of work per month. C’mon, get off the lazy track and start putting the odds on your side.
To turn the BP stock dividend, the GM stock dividend, and the Kinder Morgan dividend into monthly dividend stocks and cash cows, we are going to show you how to add a monthly collar to your long stock positions in each of these stocks.
What is a Collar?
Remember, people like dividend stocks because they are paid a yield for holding the stock. It is the concept of getting paid to wait. It is the concept of liking a company and getting paid to be an investor. Whatever the reason people have for owning dividend stocks and collecting a yield, the truth is, the just like getting paid. If they like getting paid four times a year, they are going to love getting paid twelve times a year. Enter monthly dividend stocks via collars.
To turn a normal dividend stock into the class of monthly dividend stocks we simply add a collar. How to do we do that?
First, we buy a stock that is paying a dividend (at least 100 shares).
Second, we sell one call for every 100 shares of stock we own.
We sell one put out of the money.
A normal collar trade is a little bit different. In a normal collar strategy, we own the stock and sell a call like we are going here, however, they recommend buying a put instead of selling one. We do not agree with that, and that is why we call this type of collar the Cash Collar.
The cash collar trade is meant to maximize the amount of credit we receive over one year. Rather than just receiving the dividend, we turn these stocks into monthly dividend stocks by continuing to put on monthly Cash Collar trades.
We are going to show you how we can add monthly Cash Collar’s to normal dividends (BP dividend, KMI dividend, and GM dividend) to turn them into monthly dividend stocks that will pay us more money for only five minutes of extra work a month.
I am sure at this point you think this is something that is a little difficult. I can assure you at the end of this article you will not only be telling me this is reasonable but that you are going to start adding Cash Collars to your dividend paying stocks tomorrow.
Here we go!
BP Stock Dividend…Cash Collar + the BP Dividend
The BP dividend yield is not that bad. Actually, it’s more than not bad. It’s pretty damn big.
$2.38 per share on a $34.99 stock is roughly 6.80%. That is a high dividend and this Cash Collar plus the BP dividend is going to generate a ton of cash. Remember, the goal is to add this Cash Collar to the BP dividend and turn BP into one of our monthly dividend stocks. Here we go.
Buy 100 shares of stock.
Check. We purchased 100 shares of BP stock for $34.99. And because it pays a $2.38 dividend over the course of the year, we can expect to receive four payments of $0.595 in credit throughout the year and $2.38 in total for the BP dividend.
Sell one call.
We can sell the $36 call expiring 33 days from now and collect $0.33 cents per share or $33 total. Remember, we are turning BP into one of our monthly dividend stocks so we will be doing this every month. This trade costs nothing as we already have 100 shares of stock so we are selling a call to cover out BP stock position here.
Sell an out of the money put.
Check. Again, to turn BP into one of our monthly dividend stocks we must sell an out of the money put to collect even more credit. For this, we will sell a $33 put for $0.36 per share or $36.
Cash Collar is complete.
The Cash Collar is complete and we have taken the BP stock dividend, sold a call, and sold a put to turn BP into one of our monthly dividend stocks. But what do we have here?
- The BP dividend will pay us $2.38 per share per year.
- Selling a monthly call could generate another $0.33 per share per month ($3.96 per year)
- Selling a monthly put could generate another $0.36 per share per month ($4.32 per year)
When we take the money we receive from the BP dividend and add it to the money we generate for selling the monthly call and the monthly put, we get the total amount of money collected over a year with the Cash Collar. That number is $10.66.
While the BP stock dividend is equal to a 6.80% BP dividend yield over the course of a year, the BP Cash Collar generates 30.04% per year.
Bam. We just took the plain old BP dividend and turned BP into one of our must have monthly dividend stocks.
Kinder Morgan Stock Dividend…Cash Collar + the KMI Dividend
Rinse and repeat on the Cash Collar. What is the current KMI dividend yield?
With a $.50 per share dividend payment and a $21.39 stock price, the KMI dividend yield comes to 2.34% currently. Not great, but for those who are interested in yield at all cost, the KMI dividend isn’t so bad. However, we are going to make it that much better than we call the Cash Collar to the standard KMI dividend.
Buy 100 shares of stock.
Check. And because we are planning on being a shareholder for more than a year, we are entitled to the KMI dividend of $0.50 per share. We bought 100 shares, so the KMI dividend will pay us $50 over the course of the year. Not great but it’s only a $20 stock.
Sell one call.
Check. We are going to sell the $22 call because the Cash Collar is a monthly dividend stocks strategy. For this, we will collect $0.32 per share or $32. Again, selling this call to cover our stock position does not cost us anything because we already own 100 shares of stock.
Sell one out of the money put.
Done. We sold the $20 call for $0.18 per share (100 shares) expiring in the same month as the call we sold because the Cash Collar is a monthly strategy and we want KMI to be one of our monthly dividend stocks!
Remember, we want to do better than the standard KMI dividend. That is why we also sold and call and a put every month. Let’s see what that looks like compared to just collecting the KMI dividend.
- The KMI dividend will pay us $0.50 per share per year.
- Selling a monthly call could generate another $0.32 per share per month ($3.84 per year)
- Selling a monthly put could generate another $0.18 per share per month ($2.16 per year)
When we take the money we receive from the KMI dividend and add it to the money we generate for selling the monthly call and the monthly put, we get the total amount of money collected over a year with the Cash Collar. That number is $6.50.
While the Kinder Morgan stock dividend is equal to a 2.34% KMI dividend yield over the course of a year, the KMI Cash Collar generates 30.38% per year.
Bam. We just took the plain old KMI dividend and turned KMI into a beast.
GM Stock Dividend…Cash Collar + the GM Dividend
Round three. General Motors. What is current GM stock dividend yield?
This is actually pretty good. With a dividend per share of $1.52 and a current stock price of $33.39, the GM stock dividend yield if about 4.55%. That is actually pretty big. Like we did for the BP dividend and the KMI dividend, we are going to jack up the GM dividend by adding our monthly Cash Collar. Here we go.
Buy 100 shares of stock.
Bam. And because we are planning on being a shareholder of General Motors for one year, we are entitled to the GM dividend of $1.52 per share. We bought 100 shares, so the GM dividend will pay us $152 over the course of the year.
Sell one call.
Done. We are going to sell the $35 call because the Cash Collar is a monthly strategy. For this, we will collect $0.48 per share or $48 for our 100 shares of stock. Again, selling this call to cover our stock position does not cost us anything because we already own 100 shares of stock.
Sell an out of the money put.
There we go. We sold the $31 call for $0.34 per share expiring in the same month as the call we sold because the Cash Collar is a monthly strategy.
Remember, we want to do better than the standard GM dividend. That is why we also sold and call and a put every month (monthly Cash Collar). Let’s see what that looks like compared to just collecting the GM dividend.
- The GM dividend will pay us $1.52 per share per year.
- Selling a monthly call could generate another $0.48 per share per month ($5.76 per year)
- Selling a monthly put could generate another $0.34 per share per month ($4.08 per year)
When we take the money we receive from the GM dividend and add it to the money we generate for selling the monthly call and the monthly put, we get the total amount of money collected over a year with the Cash Collar. That number is $11.35.
While the GM stock dividend is equal to a 2.34% GM dividend yield over the course of a year, the GM Cash Collar generates 33.99% per year.
Bam. We just took the plain old GM dividend and turned GM into an absolute winner.
Wrapping Up Monthly Dividend Stocks
Buying a dividend stock, sitting back, and doing nothing is not something we are interested in here at Stony Brook Securities. We want to maximize our returns. If we MUST get involved in dividend stocks, let’s turn them into monthly dividend stocks!
How do we do that? We create monthly cash collars which generate additional income from selling calls and puts against the long stock you already have. We showed how we can do the following to make the BP dividend, KMI dividend, and KMI dividend into cash cows. We did this by:
- Buying 100 shares of stock and collect the dividend
- Sell a monthly call against your stock
- Sell a monthly out of the money put
By doing these monthly Cash Collars, here are our new returns strictly based on the amount of credit we could receive in one years time compared to doing the bare minimum and collecting a dividend.
|Stock price||Dividend||Yield||Cash Collar Dividend||Cash Collar Yield|
All of this can be done it five minutes a month. At the beginning of this article, you were freaked out about how complicated this is. I know that everyone now has the confidence to go out there and do these trades tomorrow.